The Energy-Efficient Supply Chain

As concerns mount about fuel prices, long-term energy availability, and climate change, companies’ attention is finally turning toward one of the most pervasive places where energy can be conserved: the industrial supply chain. Simply put, the supply chain is the production and distribution network that encompasses the sourcing, manufacturing, transportation, commercialization, distribution, consumption, and disposal of goods, from the ore mine to the trash can.

Four primary factors drive businesses’ interest in the energy-efficient supply chain. First is the desire to cut energy costs. Second is concern about regulation — through trading permits, mandated caps, and other means, governments will increasingly press businesses to limit the amount of carbon they release. Third, a growing segment of customers favor companies that credibly demonstrate reduction of carbon impact. The fourth driver is productivity: The economies that a company like Wal-Mart or Tesco puts in place to reduce emissions can reduce other costs and improve operations as well.

On January 18, 2007, Tesco CEO Terry Leahy announced that the retail chain would reduce the carbon footprint of all stores and distribution centers by 50 percent over the next 15 years. That kind of target cannot be realized by placing unilateral pressure on suppliers. It requires efforts that build trust and transparency along the value chain. When suppliers and customers understand one another’s contributions to carbon emissions, they can identify ecological and economic waste that would otherwise be hard to see.

For example, in 2006, the Carbon Trust, a United Kingdom–based research and advisory group, discovered a “perverse incentive” in the sourcing of raw potatoes for manufacturing snack foods. (The analysis appeared in the group’s report, “Carbon Footprints in the Supply Chain: The Next Step for Business.”) Charged with studying the carbon footprint of potato chips, the Trust’s researchers found that because prices are set by weight, farmers typically control humidification to produce moister and therefore heavier potatoes. Even within the strictly limited specifications of moisture content set by the food manufacturers, these few grams of extra water are significant. The extra cooking needed to burn them off accounted for an unexpectedly high percentage of the chips’ energy consumption.

An obvious solution, wrote the Carbon Trust, would be to change the procurement contract — to provide farmers with an incentive to produce potatoes with less moisture. This would better position the manufacturers to take advantage of carbon trading credits and other regulations for greenhouse gas reduction. And it would set a precedent for further collaboration between food makers and their agricultural suppliers.

Similar approaches have been used to study the energy footprints of a range of products, from the United Kingdom’s Mirror newspaper chain, to Unilever’s Vaseline hand lotion, to cameras made by Kodak and Hewlett-Packard. Even though it has been 15 years since the pioneer packaging-reduction incentives of Germany’s “Green Dot” labeling program were put into effect, there is still much to learn about the waste of energy and materials in the typical supply chain.

In the potato chip case, for example, production-related greenhouse gases dwarfed the emissions from transportation. In other cases, transportation and logistics are much bigger factors, with enormous potential gains. A 1993 study of Landliebe Yogurt (a local brand made and sold in Stuttgart, Germany) revealed that the ingredients in a single container — including milk, strawberries, wheat, cultures, glass for the jar, paper for the label, and aluminum for the lid — had traveled a total of more than 9,100 kilometers (about 5,600 miles) before reaching the consumer’s hands.

Some of the innovations of the next five years will focus on reducing this type of inefficiency. Marks and Spencer, for example, has a specific initiative under way to reduce “food miles,” sourcing its wares from nearby locales and working with local farmers to increase the growing season. Other initiatives will increase transportation efficiencies: A truck that once carried 150 items will now carry 300, or carry the same volume of goods with less fuel. Other projects will reduce and simplify packaging, closely track the joules consumed, or switch to less carbon-intensive materials and energy sources (such as renewable energy and more efficient lighting sources). Already, some business-to-business producers and service providers, including gasoline retailers and airlines, are using government-mandated pollution credits to offer climate change–conscious services for customers (“buy our product and help offset your own greenhouse gas impact”).

As businesses become more and more serious about this, managers will increasingly find themselves asking, What is it about the way we operate that causes our entire supply chain to waste energy? There will be many surprises. One should not conclude that all lightweight snacks, nearby farms, or recycled materials are preferable from a climate change perspective. Every supply chain is different, with unique opportunities for using information technology, management practice, incentives, and sheer common sense to reduce the carbon footprint.

The first step is thus understanding the specific carbon footprint of your business’s supply chain, in the context of overall strategy and operations. The second step is discerning the extent to which emissions are related to your specific needs, versus those inherent in supply chain management. The third is defining your approach. It is likely to be a combination of three types of measures: reducing your footprint through demand reductions and energy efficiency in design, construction, and operation; replacing conventional energy sources and materials with low- or zero-carbon alternatives, including materials and equipment with low-embodied carbon; and offsetting unavoidable carbon emissions through a program of credit trading and other verified means.

Author Profiles:

Peter Parry ([email protected]) is a vice president with Booz Allen Hamilton in London. He specializes in global energy and has 25 years of experience in corporate strategy development, technology management, and commercial negotiations. He has worked extensively with governments, national and international oil companies, and independent oil and service companies.Joseph Martha ([email protected]), a vice president with Booz Allen Hamilton in McLean, Va., is the coauthor, with David Bovet, of Value Nets: Breaking the Supply Chain to Unlock Hidden Profits (Wiley, 2000). He has worked with numerous manufacturing, distribution, and retail companies in the areas of supply chain management, logistics strategy, distribution operations, and information systems.Georgina Grenon ([email protected]) is a senior associate with Booz Allen Hamilton based in Paris. She is the director of the firm’s business development and intellectual capital efforts involving manufacturing and cross-industry supply chain issues.
Also contributing to this article were Booz Allen Vice President Nick Pennell and Senior Consultant Timothy Gange.

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